Schering to Pay a Fine of $500 Million

Pressing the drug industry to pay more attention to manufacturing quality, the Food and Drug Administration on Friday levied a record $500-million fine against Schering-Plough Corp. for repeatedly failing plant inspections. The FDA also set strict quality control terms on four Schering-Plough facilities in a consent decree that will last through 2005.

Larger federal government fines have been levied against drug companies, most notably the $875-million fine against TAP Pharmaceuticals in October for Medicaid fraud, but Friday’s fine was the biggest yet from the FDA.

The agency’s penalties for pharmaceutical company quality control deficiencies have grown increasingly severe since it gained the right to levy fines through a federal appeals court decision in 1999.

“This action is another clear sign that the FDA will continue to enforce the rules and regulations requiring companies to carefully control and monitor their processes used to make pharmaceuticals and other products,” FDA Deputy Commissioner Lester M. Crawford said. “Manufacturers who choose to wait until FDA investigators find violations rather than policing themselves will find that they have made a poor and costly decision.”

Other companies under FDA scrutiny include Abbott Laboratories, which announced Wednesday that federal regulators declared that one of its plants has failed to comply with quality standards. Abbott paid a $100-million fine in 1999 to settle accusations that it failed to meet quality standards in the production of medical test kits.

Late last year, the FDA announced that Paris-based drug maker Roussel Uclaf had been fined $33 million for deliberately failing to disclose all of the locations where the antibiotic Cefaclor was being manufactured. And Watson Pharmaceuticals Inc. of Corona was placed under an FDA consent decree May 3 based on manufacturing practices, but the company was not fined and there were no product recalls.

Schering-Plough said it won’t meet 2002 earnings estimates because the consent decree will add to production costs and may delay some shipments.

The company had been expected to earn 46 cents a share in the second quarter and $1.74 for 2002, the average estimate of analysts polled by Thomson Financial/First Call. Second-quarter profit may not exceed last year’s 43 cents a share, the company said.

Nevertheless, several Wall Street analysts, who had been waiting for this shoe to drop since late last year, considered the fine and consent decree good news for the company and investors.

Schering-Plough’s stock rose more than 5.5% in Friday trading, up $1.37 to $26.12 on the New York Stock Exchange.

“Today’s news is simply a confirmation of what we already knew. The company had already set aside $500 million for the fine, and now we know what it has to do to comply with the FDA,” Morningstar analyst Todd Lebor said.

The stock took a tumble Wednesday on the news that the FDA’s Office of Criminal Investigations in Puerto Rico had launched a criminal probe on one or more of Schering-Plough’s products.

That occurred amid speculation that production of the company’s newest allergy drug, Clarinex, might be shut down. Clarinex production had already been delayed by the quality control dispute.

“This gives some clarity that we are not looking at any major disruption in the availability of Schering-Plough’s key strategic products, which could have done irreparable harm to the company,” said analyst Richard R. Stover of Arnhold and S. Bleichroeder.

Four Schering-Plough plants in New Jersey and Puerto Rico are covered by the decree, which must still be approved by a federal judge.

But they can continue to produce the company’s most promising and best-selling drugs, such as Clarinex, Claritin and Rebetol, as well as asthma inhalers and dermatology products. Production of some veterinary products will cease at one Puerto Rico plant until upgrades can be made.

The decree requires Schering-Plough to submit to extra reviews and reports. The company also will have to hire outside experts to ensure that manufacturing methods, procedures and controls meet FDA quality standards.

Schering-Plough might have to pay as much as $175 million in additional fines if it doesn’t meet the deadlines in the consent decree, the FDA said.